Xerox’s Troubles Prompt Takeover Talk

Xerox Corp. warned Wednesday that its profit woes will continue in the second half of this year, hammering the stock to a five-year low--and raising questions about whether the legendary company has become takeover bait.

The Stamford, Conn.-based tech pioneer, whose stock has plunged 69% in the last year amid accounting and reorganization woes, reported operating earnings that met lowered Wall Street forecasts.

But the company said analysts should cut earnings estimates for the second half and expect a recovery beginning in the fourth quarter.

It was too much for Wall Street: The stock tumbled $2.94, or 16%, to $15.25 on the New York Stock Exchange, its lowest since 1994.

Salomon Smith Barney analyst Jonathan Rosenzweig cut his rating on the stock from “outperform” to “neutral”--as close as analysts usually get to “sell.”

“After a long and arduous ride, it’s now time to fully abandon ship,” Rosenzweig told clients.

“The range of problem areas is what’s so troubling,” Rosenzweig said in an interview. “It’s not just the product line, it’s execution, it’s financial controls, it’s competition on both the high end and the low end.”

Along with intensifying competition and a bungled realignment of the sales force as the company focuses more on office printers than copiers, Xerox has been hurt by accounting irregularities at its Mexican unit, now under investigation by the Securities and Exchange Commission.

Xerox said Wednesday that second-quarter operating profit fell to $222 million, or 30 cents a share, from $448 million, or 62 cents, a year earlier. Sales fell 4% to $4.69 billion.

Chairman Paul Allaire, brought back to the helm in May when former CEO Rick Thoman was ousted, said Wednesday that the company will fall short of third-quarter profit projections of 38 cents a share.

Investors should make a “significant downward adjustment to current second-half expectations,” he said, but added that he expects signs of improvement by yearend.

Xerox, which created the first office copier in 1959, was one of the hottest stocks of the 1960s. But by the late ‘70s and early ‘80s, the company had been outpaced by Japanese competition, and the stock plummeted.

Xerox managed to turn itself around with cost-cutting and investments in new technologies. Some of its Silicon Valley-based research was critical in the birth of the computer age--though key elements of that research were exploited by other firms, not Xerox.

By the mid-’90s, Xerox stock was soaring again, as the company transformed itself from a black-and-white, light-lens copier company to a digital, color and document “solutions” firm.

Now, Xerox’s mounting woes are giving Wall Street a bad case of deja vu.

But the battered share price also could entice a suitor, some analysts said. “There’s a big possibility it becomes a takeover candidate at these levels,” said Marjorie Saint-Aime, an analyst at Pittsburgh Institutional, a research firm in Great Neck, N.Y.

“We would be kidding ourselves if we didn’t think this is on somebody’s radar screen now,” said analyst Daniel R. Kunstler at J.P. Morgan.

A posting at the Motley Fool’s message board (https://www.fool.com) raised the question: “I can’t help but wonder which, if any, companies out there would have an interest in acquiring XRX? It seems to me that XRX offers a lot of hidden value based on their research ability and the fact that they did hit the lowered consensus estimates for this quarter. XRX’s problems seem to be clearly and unequivocally its management team.”

But Salomon’s Rosenzweig downplayed the likelihood of a takeover. “At $10 billion in market cap, this is still quite a big company. I don’t know who would be interested,” he said. “Printing is not exactly the fastest-growing industry out there, and I’m not sure a rival like Hewlett-Packard would need it. They’re already leading in the key areas that Xerox is trying to focus on, such as desktop printing.”

Regardless of whether a suitor appears, some analysts and investors said Xerox could prove to be a bargain at these levels.

J.P. Morgan’s Kunstler said he still likes the stock long-term. “Do I abandon ship? I think the answer is no,” he said. “We’ve gotten totally side-swiped, but this a resilient franchise with a lot of attributes. Of course, it’s going to require patience.”

George Putnam, editor of the Turnaround Letter, a Boston-based newsletter that tracks beaten-down stocks, said he would look for signs of stock-price stability before considering investing.

“It’s starting to become interesting as a turnaround play. But there’s an expression that you shouldn’t try to catch a falling knife,” he said. “That said, it has some of the things we look for in a turnaround: a good franchise, a new management team being built, and the company is not all that highly leveraged. It’s really just a matter of timing.”

Analysts said Xerox could require plenty more patience from investors. Management’s prediction of a fourth-quarter turnaround “has got to be a hard target to hit,” Rosenzweig said. “Their credibility is very shaky.”

Though he believes Xerox will eventually get back on track, he said that after several quarters of negative guidance, the company would need to show “dramatic improvement” for investors to become believers again. “We’d need to see an order pickup and competitive battles at the high end of the product lines.”

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Times wire services were used in compiling this report.

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No Mercy on Wall Street

Xerox’s repeated warnings about its earnings prospects have pushed its stock (ticker symbol: XRX)

to its lowest level since 1994.

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Xerox shares, quarterly closes and latest on the New York Stock Exchange:

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Wednesday: $15.25, down $2.94

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Source: Bloomberg News